Strategy & Finance
Valuation is essential for investors, business owners, and analysts to determine the worth of a company. Whether acquiring a business, seeking investment, or planning an exit strategy, understanding valuation ensures better decision-making.
Definition: This method values a company based on its net assets.
Formula: Total Assets - Total Liabilities
β Strengths: Quick & conservative valuation.
β Weaknesses: Ignores intangibles like brand equity.
Definition: Adjusts assets to reflect market prices.
β οΈ Challenges: Requires market reassessment.
Definition: The cash generated from rapid asset sale.
Definition: Focuses on a company's ability to generate earnings.
Formula: Net Income Γ P/E Ratio
β Strengths: Simple & widely used.
Formula: EBIT Γ EBIT Multiple OR EBITDA Γ EBITDA Multiple
Formula: Ξ£ (FCF_t / (1+r)^t) + Terminal Value / (1+r)^T
| Valuation Method | Formula | Strengths | Weaknesses | Best Use Cases | Key Metrics |
|---|---|---|---|---|---|
| π Equity Book Value | Total Assets - Total Liabilities | Quick & conservative | Ignores market valuation | Distressed companies | Total Assets, Liabilities |
| π EBITDA Multiple | EBITDA Γ Multiple | Good for comparisons | Overstates cash flow | Private equity, M&A | EBITDA, Industry Multiples |
| π DCF Method | Ξ£ (FCF_t / (1+r)^t) + Terminal Value / (1+r)^T | Future-oriented | Highly assumption-sensitive | High-growth firms | Free Cash Flow, WACC |
Each valuation method has its strengths and weaknesses. A comprehensive analysis often requires using multiple approaches to get an accurate estimate of a company's worth.